Around the globe, securities regulators have a new mantra: “principles-based” regulation. Uniformly, they are proclaiming that they are moving toward “principles” and away from “rules.” The Financial Services Agency in the U.K. announced a shift to a “comprehensive principles-based” system in 2003, and British Columbia followed a year later. In the United States, Treasury Secretary Paulson has suggested that to maintain global competitiveness, the United States must quickly shift to a “principles-based” system, and a variety of business groups have issued similar calls.

One thing then is clear: At least as a rhetorical strategy, siding with “principles” certainly gains one more popularity than taking the side of “rules.” Indeed, merely to juxtapose the two is to suggest a contrast between reasoned and cogent “principles” and musty old “rules” that have been collecting in some legal attic for decades and desperately need a ruthless editing. But why then is the United States (and particularly the SEC) seen by these critics as the leading example of a system that is “rule-driven”? After all, the United States is the home of legal realism, while Europe is usually thought to be much more characterized by legal formalism.

In truth, the debate between “rules” and “principles” (or “standards”) has gone on in academia for decades, and both sides in this debate can make some obvious points: “rules” are precise, relatively certain, promote equality, and reduce the likelihood of bias or the abuse of power. Conversely, the case for “principles” is that they provide flexibility to, and demand accountability from, the regulator, can adapt to changing circumstances, and permit those subject to them to make their own choices about the means of compliance. All this has been said many times before. So why has one side seemingly suddenly won the debate?

Clearly, there are subtexts to this debate. To understand them, let’s use a simple example. If a legendary torts scholar, such as Columbia’s Willis Reese, were asked a half century ago to explain the difference, he might have drawn the following contrast: “Drive at a reasonable rate of speed” is a principle. “Drive at 60 mph” is a rule. Both have some advantages. The principle fits all cases and recognizes that contexts (e.g., night versus day, good weather versus bad) might differ. Conversely, the 60 mph rule has bright lines, poses no real interpretive problems, and, most of all, is easy to enforce. A traffic court that had to listen to several hundred motorists explain each day why they were driving reasonably under the circumstances (at 70 mph) might find it impossible to function.

So this gives us one insight into the debate: those who wish to soften enforcement may prefer a principles-based system. For example, securities regulators often impose specific, detailed, and broadly prohibitory rules on brokerage firms in order to protect retail customers. If a principles-based system said instead only “treat the customer fairly,” this might permit the broker-dealer to invent innumerable reasons ex post as to why its conduct had been fair under all the circumstances.

Still, the enforcement variable actually cuts both ways. Sometimes the regulated also prefer bright line standards. The leading example of such a preference involves the United States’ inventory of “generally accepted accounting principles” (or “GAAP”), which is generally recognized to be a maze of complex and minutely specific rules. Why does U.S. GAAP tilt this way when international financial reporting standards are far more “principles-based”? The answer is that United States issuers and accountants want safe harbors as a protection against the threat of litigation. A general “principles-based” standard often leaves open triable questions as to whether the regulated person truly complied with it. In the United States, where contingent fee-motivated plaintiff’s attorneys can bring securities class actions involving potentially billion-dollar claims, the danger is simply unacceptable that a judge or jury might find the defendant not to have complied with a broad, aspirational principle. In contrast, in Europe, where the class action is still largely unknown, the need for safe harbors is less pressing.

The point then is that the legal environment counts. One cannot identify the optimal point on the continuum from hard-and-specific rules to aspirational principles without taking into consideration these environmental factors.

Another way to view the rules/principles dichotomy is in terms of how much the regulator must decide in advance. A rule generally contains a prescription of the conduct that is permissible, leaving it to the fact-finder to determine only whether the proscribed conduct occurred. In contrast, a principle may permit the regulator to decide after the fact both what conduct should be impermissible and whether it in fact occurred. This gives the regulator either greater flexibility or more arbitrary power—depending on one’s perspective.

Curiously, while the United States is seen as “rule-fixated,” it actually plays it both ways. Within the context of securities regulation, a U.S. issuer that wants to sell its securities to the public must prepare a prospectus, containing very elaborate disclosures set forth in the SEC’s Regulation S-K. This is a lengthy manual describing in great detail what must be disclosed. But, once the issuer satisfies these requirements on an ex ante basis, it still remains subject to very broad anti-fraud rules ex post. Rule 10b-5 is the very model of a “principles-based” standard because it states only the most general of commands: disclose all material information. That the issuer prepared a 100-page prospectus complying with the SEC’s mandated “rules” in Regulation S-K is no defense to a claim that it failed to satisfy the broader “principle” of full disclosure set forth in Rule 10b-5 because it allegedly withheld some material fact.

Although fashions may change, the “rules” versus “principles” debate will probably never end, and any imaginable system must contain both. More importantly, in a time of financial crisis when investor confidence has eroded, any attempt to shift dramatically the balance between principles and rules is risky and could further undermine the credibility of regulators. Reformers should therefore be guided by the ancient motto of Augustus: “Festina Lente”—make haste slowly.